Jason Long is a partner and an International Investment Analyst at Harris Associates. He joined the firm in 2011. Jason has held previous roles at Security Global Investors, Carmel Capital Partners and Brandes Investment Partners. He has a BA from San Diego State University and is a CFA charterholder.
Regulatory pressures, a challenging macroeconomic environment, and remnants of the financial crisis have led many investors to conclude that European financial institutions should be avoided at all cost. While we agree that the sector will continue to encounter challenges, we believe it is important to distinguish between weaker institutions and those that have the business models and balance sheets necessary to succeed in this new operating environment. Our bottom-up analysis has resulted in positions in several financial institutions that we believe possess excellent business franchises, good management teams, strong balance sheets, and very attractive valuations.
In our analysis of European banks, we previously identified several headwinds facing the industry, including: increased capital requirements, higher wholesale funding costs, and slowing economic growth. Given these headwinds, we felt that banks with less capital-intensive businesses, such as asset management or advisory, would be attractive as they could more easily navigate these higher capital requirements. We also believed that increased capital requirements would result in a lower return on equity, which we incorporated into our valuations. Also, it became evident that banks with strong deposit franchises and liquidity would have a funding cost advantage over wholesale-funded banks and be better positioned during times of crisis. Finally, we felt banks with significant scale would be able to deliver products and services more efficiently than their peers.
Our European bank holdings possess many of these competitive advantages while trading at what we believe are very compelling valuations. Our Swiss banks (Credit Suisse (CS, Financial) and Julius Baer (XSWX:BAER, Financial)) have very large and profitable private banking operations, which we believe are both low risk and generate a tremendous amount of free cash flow. Despite this advantaged business model, our two Swiss banks trade at very low multiples of their normal earnings power. We think the market has mistakenly grouped these Swiss private banks with the rest of the European banks, and we are only too happy to hold what we consider valuable franchises with strong balance sheets until more rational thoughts take place.
